KF27 ESS46 19850 PL.4 COMMITTEE ON ENERGY AND COMMERCE JOHN D. DINGELL, Michigan, Chairman JAMES H. SCHEUER, New York W.J. "BILLY" TAUZIN, Louisiana RON WYDEN, Oregon RALPH M. HALL, Texas GERRY SIKORSKI, Minnesota JAMES T. BROYHILL, North Carolina THOMAS J. BLILEY, JR., Virginia MICHAEL G. OXLEY, Ohio Briloff, Abraham J., professor of accountancy, Bernard M. Baruch Col- lege, City University of New York.. Christy, Ralph W., deputy general counsel, Federal Home Loan Bank Gray, Edwin J., chairman, Federal Home Loan Bank Board. .... Kirk, Donald J., chairman, Financial Accounting Standards Board. Moore, Robert J., chief accountant, Office of Examination and Supervi- sion, Federal Home Loan Bank Board. Neuberger, Brian, deputy director, Federal Savings and Loan Insurance 399 143, 399 Tew, Thomas, attorney, Finley, Kumble, Wagner, Heine, Underberg, 5 Upton, Wayne, practice fellow, Financial Accounting Standards Board. Williams, Julie, associate general counsel, Federal Home Loan Bank Zimmerman, Park T., supervisory agent, Federal Home Loan Bank Board Material submitted for the record by: Briloff, Abraham J.: Letter to Chairman Dingell, February 18, 1986............. Letter from Ralph W. Christy to Chairman Dingell, October 31, 1985, transmitting report entitled: "Bank Board Securities Jurisdiction Financial Accounting Standards Board: Letter to Chairman Dingell from James J. Leisenring, chairman, 645, 647 Correspondence between Hon. Thomas A. Luken and the Federal Correspondence with the Federal Home Loan Bank Board, the Con- gressional Research Service, and subcommittee memorandums......... Federal Home Loan Bank Board examination reports and memoran- 462, 475 Interview of Peter Stearns, former FSLIC Director, by the Bureau of 436 SEC AND CORPORATE AUDITS Failure of ESM Government Securities, Inc. MONDAY, NOVEMBER 4, 1985 HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, Washington, DC. The subcommittee met, pursuant to notice, at 10 a.m., in room 2123, Rayburn House Office Building, Hon. John D. Dingell (chairman) presiding. Mr. DINGELL. The subcommittee will come to order. Today the subcommittee is conducting the ninth hearing in its legislative oversight inquiry into the effectivenss of the regulatory system established by Congress under the Federal securities laws. That regulatory system, which is comprised of Federal agencies and public accounting firms, was established more than 50 years ago to safeguard our economy from financial abuses and illegal business practices. It is time for Congress to take a fresh look at the present system, especially in view of the major financial frauds and Government bailouts which regularly appear in the newspa pers. Today's hearing will explore in greater detail the failure last April of ESM Government Securities, Inc., and the resulting collapse of the entire State-insured savings and loan industry in Ohio. Testimony at subcommittee hearings held April 2 and 17, 1985 showed that ESM had been insolvent since at least 1980, with cumulative losses totalling $200 million. At the April 2, 1985 hearing, Mr. Thomas Tew, the court-appointed receiver for ÉSM, provided the subcommittee with an excellent report on his initial findings after a 30-day inquiry into the ESM affairs. Now that he has had time to evaluate the events thoroughly which led to the failure of ESM, Mr. Tew will detail his findings that three thrift institutions were improperly used to prop up ESM for 5 years, under conditions that may constitute serious impropriety. Representatives of the Federal Home Loan Bank Board will also testify today about their actions and responsibilities in implementing the Federal securities laws, particularly with respect to the impact of the ESM failure on the American Savings and Loan Association of Florida. Testimony at the two previous subcommittee hearings regarding ESM revealed that major participants in the Federal regulatory system exercised their responsibilities on the assumption that (1) "people are honest." The ESM debacle is a very painful lesson that no credible regulatory system can be based on the assumption that everyone is honest. The inability of the regulatory system to detect this massive fraud for 5 years is of great concern to the subcommittee. The Federal agencies and independent auditors charged with implementing the laws all failed to protect the public from the widespread and disastrous consequences of the ESM collapse. Today, we will examine the reasons for this failure. Finally, I want to note for the record that Chairman Gray was invited to testify before the subcommittee this morning, but he declined to attend due to prior commitments. Ambassador Marvin L. Warner and Messrs. Shepard Broad and Morris Broad have also declined, through their attorneys, the subcommittee's invitation. We will see if we can't afford them an opportunity to present their views at today's hearing. The first witness today is Mr. Thomas Tew, Esquire, of Finley, Kumble, Wagner, Heine, Underberg, Manley & Casey, of Miami, FL. Mr. Tew, we are honored that you are with us today. We thank you for your assistance to the committee. We note that you have an associate there at the witness table, and since you have been before this committee, you are familiar with the way that we have to proceed. Copies of the Rules of the Subcommittee are there before you to inform you of your rights, and the limitations on the powers of the committee. Do you desire to be accompanied by counsel during your answers? Mr. TEw. Yes; I am accompanied today by Mr. Mark Raymond, of our law firm. Mr. DINGELL. Does he appear to assist you in your testimony or appear as counsel? Mr. TEw. Really in both capacities, Mr. Chariman. Mr. DINGELL. Well, decide whether he is going to appear as counsel. If he wishes to advise you as counsel, we will see to it that concern of his is fully respected. If he wishes to testify we will, of course, have to swear him. Is that acceptable? Mr. TEW. Yes, sir. Mr. DINGELL. Then, if you will rise, Mr. Tew. [Witness sworn.] Mr. DINGELL. You may consider yourself under oath. Before we recognize you to testify, the Chair is going to recognize the members for opening statements. The gentleman from Oregon. Mr. WYDEN. Thank you. I want to commend you for taking on this very important investigation. I just have a very short opening statement. It seems to me what we are seeing at the Federal Home Loan Bank Board is a pervasive level of lethargy and inertia. The Bank Board is simply unwilling to use its monetary and enforcement tools to protect the shareholders and depositors of our Nation's thrift institutions. What we will see in this situation is that the Bank Board, as early as 1980, and the collapse of Unity Savings and Loan in Chica |